What does negative equity mean for me?

Find out what negative equity means, whether it affects you and what you can do about it.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

What is negative equity?

Negative equity is the term used to describe your financial situation when the current value of your home is less than the amount you have outstanding on your mortgage.

For example, if you bought a house for £200,000, a 95% interest only mortgage would be for £190,000.

If house prices dropped by 20% after you bought your house, it would then be worth £160,000 (i.e. £40,000 less than when you originally bought it).

The value of your house would be £160,000, but your mortgage balance would still be £190,000. You would be in negative equity because you would owe the bank more than you would get if you sold your property.

Who does it affect?

If you bought your house at the top of the market with a high loan to value (LTV) mortgage (e.g. 90% or more), you could be affected.

This is because the value of your home may now be less than the amount you originally borrowed.

Negative equity is only a problem for homeowners, so if you live in rented accommodation, it is not something you need to be concerned about.

If you own your home outright and have no outstanding mortgage on your property this isn't an issue that will affect you either.

If you bought your house with a large deposit or have built up equity in your property over time then, you are likely to remain unaffected unless house prices take a more substantial dive.

How to find out if you are in negative equity

Check the current value of your home and compare it to the amount outstanding on your mortgage. If your mortgage balance is more than your home's value, you are in negative equity.

Check your property's value by using an online estate agent that offers a free valuation service like Yopa, asking local estate agents for a valuation, or looking at how much similar properties in your area sold for.

Check your outstanding balance by looking at your most recent mortgage statement or contacting your lender to ask them for a balance update.

Even if you find out that you are in negative equity it doesn't mean that you need to panic. A common misconception is that your house will be automatically repossessed if you've dropped into negative equity but this simply isn't the case.

In fact, as long as you aren't looking to sell in the near future and can still afford to meet your mortgage payments, simply being in negative equity is unlikely to cause you any immediate problems.

What should you do?

How you should deal with negative equity depends on your finances and current circumstances:

You're in negative equity and need to sell

If you need to sell your home, you are responsible for making up the difference between what you owe on your mortgage and the amount you make from the sale.

Your lender has to give their permission for you to arrange the sale if the likely return is less than your outstanding mortgage.

If you are unable to continue living in your property but can't sell up, letting out your house could be an option. However, you have to run this past your lender before arranging anything.

You're in negative equity but can afford your repayments

If you keep paying your mortgage and do not need to sell your home or move house, negative equity makes little difference to your financial situation.

House prices fluctuate over time and usually increase over the long term, so it is likely your property value could rise again in the future.

If you are able to build up some equity in your property, this helps get you out of negative equity and protects you against further price declines. You can do this by continuing to pay your mortgage, or you can speed it up by making overpayments.

Check your mortgage terms and conditions carefully before you make any overpayments and check if there are any extra costs.

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